Get 20M+ Full-Text Papers For Less Than $1.50/day. Start a 14-Day Trial for You or Your Team.

Learn More →

Contemporary CritiqueThe US Supreme Court Apple v Pepper case

Contemporary CritiqueThe US Supreme Court Apple v Pepper case This issue’s Contemporary Critique discusses the US Supreme Court’s judgment in Apple v Pepper. The judgment may well shape future antitrust litigation in the Internet era, and impact on a platform’s leeway in regulating its ecosystem and those who can challenge its practices in court. Its broader effects on future class-action antitrust lawsuits have elicited heated debates on both sides of the Atlantic. In his commentary, Andrew Gavil suggests that the judgment’s spillover effects go well beyond the specific facts of the case and may trigger a debate about indirect purchaser standing and the ‘passing-on’ defence. He is of the opinion that the reasoning in Apple v Pepper with regard to the nature of antitrust damages and the importance of compensation principles will prove difficult to reconcile with the Supreme Court's earlier decision in Illinois Brick. Konstantinos Stylianou discerns the possible impact Apple v Pepper may have in Europe. He believes that it will impact future legal and policy options in the European Union (EU), for example, the process of updating the EU Vertical Block Exemption Regulation. Consumer welfare without consumers? Illinois Brick after Apple v Pepper Andrew I Gavil Andrew I Gavil Professor of Law, Howard University School of Law , Washington, DC, USA Professor of Law, Howard University School of Law , Washington, DC, USA Email: agavil@law.howard.edu I. INTRODUCTION For 40 years, US antitrust law has lived with an anomaly of the Supreme Court’s making: having declared its commitment to interpreting those laws as a ‘consumer welfare prescription’,1 the Court has nonetheless effectively barred consumers from suing for damages in private treble damage actions. This barrier to consumer standing followed from the Court’s position in Illinois Brick,2 that section 4 of the Clayton Act, which authorizes ‘any person … injured in his business or property by reason of anything forbidden in the antitrust laws’ to sue for and recover treble damages,3 should be limited to direct purchasers from an antitrust violator. Because the ultimate consumer in many common circumstances will be an ‘indirect purchaser’, Illinois Brick closed the federal courthouse doors to most consumer claims for damages, including consumer class actions. The Court appeared poised to perpetuate and extend that legacy in Apple v Pepper,4 a case that pitted a putative class of iPhone-using consumers against Apple and alleging that the company ‘monopolized the retail market for the sale of apps and has unlawfully used its monopolistic power to charge consumers higher-than-competitive prices’.5 Apple moved to dismiss the complaint, arguing that the consumers were indirect purchasers who were barred from suing under a straight-forward application of Illinois Brick. Apple argued that it acted much like any retailer, providing distribution services to app developers, who independently set the prices to be charged by Apple to consumers, making consumers indirect purchasers in their dealings with Apple. But in contrast to the typical Illinois Brick chain of distribution, Apple, not the app developers, was the alleged antitrust offender. The consumers responded, therefore, that because they had dealt directly only with Apple, they were direct purchasers and Illinois Brick had no effect on their standing. In a 5-4 decision, the Court sided with the consumers, concluding that they were direct purchasers and could therefore proceed with their action. For the first time in four decades, a majority of the Court stepped back from what might have been yet another extension of Illinois Brick, opening the door for a consumer class action for damages to proceed against Apple. At the surface, therefore, Apple is less an application of Illinois Brick than it is a case that distinguishes it: because the consumers in this market were deemed direct purchasers, Illinois Brick did not apply. The facts, having thus been distinguished, would appear to leave Illinois Brick intact for cases involving distribution chains more closely analogous to Illinois Brick. In such cases, defendants will continue to assert that indirect purchasers are barred from suing for damages and direct purchasers will still expect to recover the full overcharge attributable to anticompetitive conduct. This essay examines the Apple decision with a focus on two issues: its seeming rehabilitation of compensation principles and its approach to evaluating antitrust damages. Together, these two aspects of the Court’s reasoning may undermine the continued vitality of Illinois Brick. It argues that, although the Supreme Court formally retained what it described as the ‘bright line’ rule of Illinois Brick, the Court’s logic in explaining the nature of damages that flow from antitrust violations will prove hard to contain and difficult to reconcile with Illinois Brick’s simplistic conception of ‘pass-on’. That, in turn, will likely alter how parties litigate antitrust damage claims with multiple claimants in ways likely to invite future challenges to Illinois Brick. Apple also may have reopened long-simmering debates in the USA about how best to balance the twin remedial goals of deterrence and compensation. Since Illinois Brick, that balance has been tilted decidedly in favour of deterrence, whereas Apple has nudged US law back in the direction of compensation, ever so slightly realigning it with the policy priorities of many states and the EU. On the other hand, given the evolution over four decades of a fairly intricate federal-state, public–private enforcement ecosystem in the USA, one that now includes various stakeholders with established interests, resolving the evident tension between Illinois Brick and Apple may be too difficult a task for the courts to accomplish in any one case. Any significant reform of the US private right of action will require a kind of systemic rebalancing that, institutionally, can only be performed by Congress. II. A RETURN TO COMPENSATION PRINCIPLES? In June 1979, the Supreme Court memorably declared that ‘Congress designed the Sherman Act as a “consumer welfare prescription”’.6 It did so in a case brought as a putative class action on behalf of retail purchasers of hearing aids, who alleged that five hearing aid manufacturers had engaged in both horizontal and vertical price-fixing. It was undisputed that the consumers had purchased their hearing aids from independent retailers, not directly from the manufacturers. The issue before the Court, however, was not whether the allegedly overcharged consumers were direct or indirect purchasers, but whether they were injured in their ‘business or property’ as is required by section 4 of the Clayton Act. The Court concluded that they were. Although the Court’s decision two years earlier in Illinois Brick is referenced in a footnote, the Court declined to consider its application to the case, because the issue had not been addressed in the lower courts. The Court’s analysis in Reiter began with the text of section 4, emphasizing its first two words: ‘any person’. Quoting from two of its previous decisions, the Court observed: ‘The Act is comprehensive in its terms and coverage, protecting all who are made victims of the forbidden practices by whomever they may be perpetrated.’…. And the legislative history of the Sherman Act demonstrates that Congress used the phrase ‘any person’ intending it to have its naturally broad and inclusive meaning. There was no mention in the floor debates of any more restrictive definition.7 The Court later added that ‘the leading proponents of the legislation perceived the treble damages remedy … as a means of protecting consumers from overcharges resulting from price-fixing’ and ‘[a]t no time [in the legislative debates] … was the right of a consumer to bring an action for damages questioned.’8Reiter, therefore, associated the private right of action with compensation. In retrospect, Reiter seems anomalous. Only two years earlier, the Court had, in Illinois Brick, ignored section 4’s unambiguous statutory text and legislative history, as well as its own previous opinions, to reach a result that was widely perceived as anti-consumer: prohibiting suits for damages by indirect purchasers, who are often consumers at the end of a distribution chain. In doing so, the Court was largely animated by its concern for administrability, but also its interest in maximizing section 4’s deterrent effect. The perception that Illinois Brick undermined compensation and was hence anti-consumer led many US states to adopt their own broader private rights of action, which authorized indirect purchasers to sue for damages as a matter of state antitrust law.9 Forty years later, Apple v Pepper seems to have come full circle—at least thematically—returning to the text-based, compensation-promoting reasoning that propelled the Court in Reiter. As the Court did in Reiter, the Apple majority starts with the unqualified ‘any person’ text of section 4. And, like Reiter, it lauds the compensation goals of the private right of action: ‘[l]eaving consumers at the mercy of monopolistic retailers simply because upstream suppliers could also sue the retailers makes little sense and would directly contradict the longstanding goal of effective private enforcement and consumer protection in antitrust cases.’10 The Court then concludes by proclaiming that ‘“protecting consumers from monopoly prices” has been “the central concern of antitrust”’ since 1890.11 Apple v Pepper also echoes the warnings voiced by Justice Byron White and his fellow dissenting justices in Kansas v UtiliCorp United, Inc in 1990. Justice White, who had written the majority opinion for the Court in Illinois Brick, refused to join the majority in UtiliCorp, which further extended Illinois Brick. He cautioned that Illinois Brick ‘did not hold that, in all circumstances, indirect purchasers lack § 4 standing’.12 As had the Court in Reiter, he observed that the ‘plain language’ of section 4 ‘reflects an expansive remedial purpose’ and that ‘Congress sought to ensure that victims of anticompetitive conduct receive compensation.’13Illinois Brick, in short, should not be thoughtlessly extended to factually distinguishable cases that do not similarly pose the concerns that animated Illinois Brick. Apple v Pepper resonates with the UtiliCorp dissent, too, when it states that ‘Illinois Brick is not a get-out-of court-free card for monopolistic retailers to play any time that a damages calculation becomes complicated.’14Apple’s synthesis of Reiter and the UtiliCorp dissent, therefore, could be interpreted as a signal to the lower courts that they should be more circumspect in responding to calls for rote application and extension of Illinois Brick and more attentive to the compensation goals of the private right of action. That focus on compensation also led the Court to rethink how antitrust damages and ‘pass-on’—a controlling concept in Illinois Brick—are understood. III. APPLE V PEPPER AND ANTITRUST DAMAGES The line of cases that leads to Apple v Pepper began more than 50 years ago with Hanover Shoe, Inc v United Shoe Machinery Corp15 and became cemented nearly a decade later in Illinois Brick.16 Collectively, these decisions have focused on some of the most important conceptual and administrative challenges associated with implementing an antitrust private right of action, including: ‘what are the damages that flow from anticompetitive conduct, and how should they be measured?’ and ‘who can recover those damages, and how can the private remedy be integrated best into the overall scheme of antitrust enforcement?’ In part, the answers to these questions have turned on traditional legal interpretation, but they also have called for judgment calls that plunged the US antitrust system into a half-century of controversy that pitted the goals of deterrence and compensation against each other. Identifying ‘antitrust damages’ also has been influenced by the nature of the challenged conduct, which most often has been cartel behaviour, but also monopolization, and a focus on price-related damages. Such damages typically are associated with the exercise of market power, which in turn leads to the label ‘overcharge’: the difference between the price that was facilitated by anticompetitive conduct and the market price that would have otherwise prevailed. In the USA, the debate has been coloured, as have many other matters related to interpretation of the antitrust laws, by other characteristics of the US private right of action, especially the prevailing plaintiff’s right to recover treble damages and attorneys’ fees. Hanover Shoe addressed whether an antitrust offender should be permitted to defend against damage claims by claiming that the most immediate victim of the offense—the ‘direct purchaser’—was not harmed, because it had ‘passed-on’ all or part of any anticompetitive ‘overcharge’ facilitated by the anticompetitive conduct. In Hanover Shoe, that conduct was monopolization of a market for shoe manufacturing machinery. Concerned that a ‘no-harm-no-foul’ defence would undermine the deterrent effect of the private right of action, the Court declared that such inquiries would not be allowed. The Court in Illinois Brick made the important assumption nearly a decade later that the rules on ‘pass-on’ should be symmetrical: if a defendant could not argue that damages to the direct purchaser were passed on, then an indirect purchaser-plaintiff should not be allowed to argue that the direct purchaser passed on all or part of the overcharge to it. The Court also expressed its concern that allowing indirect purchasers to sue would commit the courts to complex damage inquiries and could allow for multiple and duplicative recoveries and hence over-deterrence. Critically, it also made the assumption that concentrating the private right of action in the hands of direct purchasers, who were in the best position to detect violations and would have the incentive to sue, would best promote deterrence. The end result was that, despite the ‘any person’ language of section 4 of the Clayton Act, indirect purchasers were barred from asserting federal antitrust claims for damages in most circumstances. Deterrence appeared to take priority over compensation, at least as a matter of federal law.17 But Illinois Brick seemingly overlooked portions of Hanover Shoe that betrayed a degree of uncertainty (or perhaps confusion) about the proper measure of antitrust damages. That long-dormant uncertainty resurfaced in Apple v Pepper. One of the most significant points of disagreement between the majority and the dissent in Apple v Pepper goes to the heart of what is meant by ‘antitrust injury’: what is the nature of the damages being sought in the case? The Court’s response to that question provided the premise for its conclusion that the members of the plaintiff–consumer class were not indirect, but in fact were direct purchasers. The majority concluded that both the app developers and consumers may have been injured by Apple’s conduct in requiring that all app sales be made through its App Store and at an allegedly supra-competitive commission rate—but that their respective damages were distinct and not duplicative. In the majority’s view, the app developers’ damage, if any, was not ‘the overcharge’, but any lost profits occasioned by the overcharge, which they experienced as an increased cost. Under this view, Apple’s distribution services were an input for app developers and the high cost of those services may have forced app developers to raise their app prices. Higher prices can reduce demand (depending on its elasticity) and hence the app developers may have lost the profits they otherwise could have made from consumers who would have purchased their apps in greater numbers if distribution costs and hence prices were lower, ie ‘competitive’. In contrast, the members of the putative consumer class suffered the resultant overcharge: the consumers who continue to purchase apps pay whatever higher prices the app developers must charge to adjust for their increased costs. This analysis of damages was arguably at odds with the long-standing view of ‘pass-on’ as a level-by-level evaluation of pricing, alone. Responding to Apple’s argument that allowing the consumers to sue would entail just the kind of risk of pass-on and duplicative recovery identified in Illinois Brick, the Court reasoned: Here, some downstream iPhone consumers have sued Apple on a monopoly theory. And it could be that some upstream app developers will also sue Apple on a monopsony theory. In this instance, the two suits would rely on fundamentally different theories of harm and would not assert dueling claims to a ‘common fund,’ as that term was used in Illinois Brick. The consumers seek damages based on the difference between the price they paid and the competitive price. The app developers would seek lost profits that they could have earned in a competitive retail market. Illinois Brick does not bar either category of suit.18 The dissenting justices took a different view. Referring to Hanover Shoe, the dissent in Apple asserts that ‘[a]s damages, Hanover sought to recover the amount it had overpaid United for machinery.’ But a closer examination of Hanover Shoe reveals that its own description of the plaintiff’s damage claims was more equivocal: ****We think it sound to hold that when a buyer shows that the price paid by him for materials purchased for use in his business is illegally high and also shows the amount of the overcharge, he has made out a prima facie case of injury and damage within the meaning of § 4. If in the face of the overcharge the buyer does nothing and absorbs the loss, he is entitled to treble damages. This much seems conceded. The reason is that he has paid more than he should and his property has been illegally diminished, for had the price paid been lower his profits would have been higher. It is also clear that if the buyer, responding to the illegal price, maintains his own price but takes steps to increase his volume or to decrease other costs, his right to damages is not destroyed. Though he may manage to maintain his profit level, he would have made more if his purchases from the defendant had cost him less. We hold that the buyer is equally entitled to damages if he raises the price for his own product. As long as the seller continues to charge the illegal price, he takes from the buyer more than the law allows. At whatever price the buyer sells, the price he pays the seller remains illegally high, and his profits would be greater were his costs lower.19 One way to read this passage is that the harm to the direct purchaser is lost profits occasioned by the overcharge, not the overcharge itself. For the direct purchaser, an ‘overcharge’, whether the result of monopoly behaviour (Hanover Shoe) or a cartel (Illinois Brick), is an increased input cost. In Apple v Pepper, it is the elevated cost of distribution services for app developers. Extrapolating further from Hanover Shoe, there would be two kinds of antitrust damages recognized for an overcharged direct purchaser, and both are types of lost profits: (i) if a direct purchaser raises price, it could lose profitable sales; (ii) if, owing to greater price sensitivity, for example, it cannot raise price, its margins may shrink. This is what is colloquially referred to as ‘absorbing the overcharge’. This is not, of course, an ‘either or’ choice. A direct purchaser might experience lost profits owing to some combination of lost sales and lower margins on the sales it still makes. In both instances, the injury to the direct purchaser is not the overcharge, but the lost profits occasioned by the overcharge. This would also be true for any intermediary purchaser of an input in an Illinois Brick-type distribution chain. Only the ultimate consumer pays an ‘overcharge’, and calculating it should not depend on ‘pass-on’—there is, in fact, no such thing in the sense the Court has discussed since Hanover Shoe. As Professor Hovenkamp has observed with reference to Apple, ‘the real injury to direct purchasers and other intermediaries in the distribution chain is not from the overcharge at all; rather, it is from the loss of sales volume. As a result the “overcharge” is not even the theoretically correct measure of damages for an intermediary who passes on at least part of an overcharge’.20 He continues: If we really wanted to reward damages based on injury to a buyer’s business or property, as the statute [Section 4 of the Clayton Act] requires, we would compute damages as lost profits for all intermediaries, including the direct purchaser. Only the final purchaser, or consumer, should obtain damages for the amount of the overcharge passed on to it. Lost profit damages do not present problems of computing pass on. To be sure, in common with all commercial damages formulas they do impose some complexities, but these are not different in substance from those experienced by the victims of exclusionary practices generally.21 The mix of lost profits—reduced margins and/or reduced sales—will depend on a number of factors, such as the degree of downstream competition, elasticity, and margins. But as Hovenkamp argues, and as seems implicit in the Apple majority’s reasoning, the nature of antitrust damages and its relationship to ‘pass-on’ has long been misinterpreted in the USA.22 To return to the example of Apple. As the majority observed, ‘through contractual and technological’ means, Apple has arguably made itself into a toll bridge that connects app developers with consumers. In addition to the consumer plaintiffs who brought the case, another class action has now been filed on behalf of a class of app developers. Both classes will attempt to prove that in a market unencumbered by Apple’s restrictions, app developers, and other content-providers might compete with each other and with Apple for distribution services. App developers might still choose to sell apps through the App Store, or they might choose direct distribution, dual distribution, some combination of the three, or methods yet to be developed. The cost of distribution services might be less (or it might just be co-opted by the developers), and the quality of services might be higher. The essential point is that the end result would be a distribution market produced by competitive forces, not Apple’s self-interested conception of how Apple iOS-compatible apps should best be distributed. Assuming that the plaintiffs can support this theory of anticompetitive effect, whether they continue to assert claims under section 2 of the Sherman Act, or they turn to focus on the contractual restraints and thus also include claims under section 1 of the Sherman Act, Apple would have to provide pro-competitive business justifications for the specific restrictions it has imposed on app developers and consumers. If it can do so, under a Microsoft-influenced approach to evaluating section 2 claims, the Court will then have to evaluate the relative strength of the evidence of harm and benefit,23 and if the rule of reason framework seemingly endorsed by the Supreme Court in Ohio v American Express Co, is applicable to Apple’s restraints, a critical issue in the case will be whether there are less restrictive ways that Apple can realize any legitimate goals it may be able to establish.24 But in terms of damages, the Supreme Court has mapped out a different course than might have been followed under the ‘pass-on’ approach associated with Illinois Brick. As the Court itself signalled, the app developers will focus on proving lost profits owing to the elevated cost of Apple-provided distribution services, whereas the consumers will have to show that Apple’s practices have resulted in supra-competitive app prices, or perhaps other competitive harms. But neither class will, if it follows the Court’s roadmap, be hiring economists to prove ‘pass-on’. IV. CONCLUSION Although the Apple majority suggests that its holding is limited to the facts of Apple, its reasoning may prove difficult to contain. Whether a victim of an antitrust violation is a ‘direct’ or ‘indirect’ purchaser may matter less after Apple than the nature of their damages. If it is an intermediary, courts may read Apple to suggest that the harm it suffers is not the overcharge, but the consequences of the overcharge. That would be true if, as in Apple, it is a firm in a market with a dominant retailer, but it might also be so if, as in Hanover Shoe and Illinois Brick, the intermediary purchased an input at supra-competitive prices attributable to an antitrust violation, such as cartel behaviour or monopolization. Apple v Pepper may therefore trigger debate about the continued reliance on the label ‘pass-on’. That label was never an accurate description of the kinds of damages that can flow from an antitrust violation. Ironically, the Apple v Pepper dissent may have contributed a valuable component of the future debate when it suggested a focus on ‘proximate cause’, but its crimped approach to proximate cause side-stepped the long-established principal of tort that can also aid antitrust analysis: different harms can flow to different types of persons from a single tortious act. Antitrust violations that end in the exercise of market power—an ‘overcharge’—are just such acts. They may simultaneously harm intermediaries by raising their input costs and diminishing their profits, and consumers who pay whatever higher price eventually results from that market distortion, a distortion that, as Professor Hovenkamp observes, can be conceptualized and measured without reference to pass-on. In this sense, the dissenters may have been right in refocusing attention on causation. They were wrong, however, in continuing to perpetuate the mistake of Illinois Brick that the right to sue should be artificially limited to the most proximate plaintiff of only one type of injury and no other. Such a return to principles of compensation, however, may ultimately have a deleterious effect on the US private right of action. As I have previously written, greater focus on ‘actual damages’ will favour defendants, leading to more motion practice directed at damage measurement and allowing them to further raise the costs of antitrust litigation for plaintiffs. It could also provide a back-door way for defendants to reintroduce a pass-on-styled defence. Defendants will seek to pit various plaintiffs against each other in pursuit of actual damages, distracting from the measure of recovery that is most important from the point of view of deterrence: the full overcharge.25 Because US enforcement agencies largely lack the authority to recover civil fines, any diminution of the ability of direct purchasers to recover that overcharge could undermine deterrence, which was one of the primary concerns voiced by the Court in Illinois Brick. Preparation of this article was made possible by a 2019 summer research stipend provided by the Howard University School of Law, which is gratefully acknowledged. Footnotes 1 Reiter v Sonotone Corp (1979) 442 US 330, 343. 2 Illinois Brick Co v Illinois (1977) 431 US 720. 3 15 USC § 15 (emphasis added). 4 (2019) 139 S Ct 1514. As both the majority and dissenting opinions note, neither party in Apple v Pepper asked the Court to overrule Illinois Brick, although as the Court also observes, 30 states and the District of Columbia filed an amicus brief inviting the Court to do so. 5 ibid 1518. 6 Reiter (n 1) 343. 7 ibid 337–38. The Court quoted from Pfizer Inc v Government of India (1978) 434 US 308, 312, which in turn relied on Mandeville Island Farms, Inc v American Crystal Sugar Co (1948) 334 US 219, 236. 8 Reiter, ibid 343. 9 In California v ARC America Corp (1989) 490 US 93, the Court held that Illinois Brick did not preempt these state law ‘Illinois Brick repealers’. See also Apple v Pepper (n 4). 10 Apple v Pepper (n 4) 1524 (emphasis in original). 11 ibid 1525. 12 Kansas v Utilicorp United, Inc (1990) 497 US 199, 220 (White, J, dissenting). 13 ibid 219–20. 14 Apple v Pepper (n 4) 1524. 15 (1968) 392 US 481. Hanover Shoe was a private follow-on case to the government’s earlier, storied monopolization case against United Shoe Machinery. See United States v United Shoe Mach Corp (1953) 110 F Supp 295 (D Mass); aff’d per curiam (1954) 347 US 521. The private plaintiff, as had the government, alleged that United Shoe’s practice of only leasing, rather than selling, its shoe manufacturing machinery allowed it to maintain its monopoly of shoe machinery and made it more costly for shoe manufacturers like Hanover Shoe to produce shoes. 16 For an analysis of the internal deliberations of the Supreme Court in Illinois Brick informed by the personal papers of some of the Supreme Court Justices who decided the case, see Andrew I Gavil, ‘Antitrust Remedy Wars Episode I: Illinois Brick from Inside the Supreme Court’ (2005) 79 St John’s L Rev 553. 17 Illinois Brick was almost instantly criticized for this set of assumptions and for undermining compensation, which in turn led many US states to adopt ‘Illinois Brick repealers’ as a matter of state antitrust law. In California (n 9), the Supreme Court concluded that these state antitrust laws were not preempted by Illinois Brick and could coexist with it. For an examination of the consequent, complex federal-state US private antitrust remedial system that emerged, see Andrew I Gavil, ‘Federal Judicial Power and the Challenges of Multijurisdictional Direct and Indirect Purchaser Antitrust Litigation’ (2001) 69 Geo Wash L Rev 860. 18 Apple v Pepper (n 4) 1525 (emphasis added). 19 Hanover Shoe (n 15) 489–90 (emphasis added). 20 Herbert Hovenkamp, ‘Apple v. Pepper: Rationalizing Antitrust’s Indirect Purchaser Rule’ (29 May 2019) 10 (emphasis in original). U of Penn, Inst for Law & Econ Research Paper No 19-27, available at SSRN: <https://scholarship.law.upenn.edu/faculty_scholarship/2082/> accessed 14 October 2019. 21 ibid 10–11. See also Andrew I Gavil, ‘Thinking Outside the Illinois Brick Box: A Proposal for Reform’ (2009) 76 Antitrust L J 167, 181 (‘overcharges (and pass-on) are not actual damages for reselling direct and indirect purchasers; they constitute increased costs that may, in turn, reduce profits’). 22 The EU has long rejected Illinois Brick as inconsistent with its laws, which guarantee full compensation to all persons who are injured by an infringement of competition laws. In late 2014, to support private enforcement, in particular, the EU adopted Directive 2014/104 on antitrust damages actions, the ‘Damages Directive’, which recognized the importance of private actions for damages under the national competition laws of EU Member States and reflects the right of indirect purchasers to seek compensation. It also directed the European Commission to adopt guidance for calculating pass-on, see <https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv:OJ.L_.2014.349.01.0001.01.ENG>, which the Commission did in 2019. See <http://ec.europa.eu/competition/antitrust/actionsdamages/passing_on_en.pdf> accessed 14 October 2019. Those Guidelines, which focus on cartel-caused damages, address both passing-on, or ‘price effects’, and what the Commission has labelled ‘volume effects’, which it describes as follows: When the direct purchaser, fully or partially, passes on the overcharge to the indirect purchaser, the latter will not only face a price effect but in many cases also reduce its demand, so that the direct purchaser sells less. The value of the sale that is lost can be referred to as the volume effect of passing-on … . Ibid, para 10. The Guidelines go on to offer an explanation for the relationship between price and volume effects, and provide instructions for how they can be calculated in private actions to differentiate between ‘price effects’ and ‘volume effects’. Apple v Pepper and the EC guidance, therefore, share a common awareness that understanding the interdependence of and relationship between overcharges and lost profits is essential. 23 United States v Microsoft Corp (2001) 253 F 3d 34, 58–59 (DC Cir) (explaining rule-of-reason-style burden-shifting framework for analysing exclusionary conduct). 24 Ohio v American Express Co (2018) 138 S Ct 2274, 2284 (explaining three-step rule-of-reason burden-shifting framework applicable to vertical restraints under s 1). 25 Gavil (n 21) 175–79. © The Author(s) 2019. Published by Oxford University Press. All rights reserved. For permissions, please e-mail: journals.permissions@oup.com This article is published and distributed under the terms of the Oxford University Press, Standard Journals Publication Model (https://academic.oup.com/journals/pages/open_access/funder_policies/chorus/standard_publication_model) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Antitrust Enforcement Oxford University Press

Contemporary CritiqueThe US Supreme Court Apple v Pepper case

Journal of Antitrust Enforcement , Volume 7 (3) – Oct 1, 2019

Loading next page...
 
/lp/oxford-university-press/contemporary-critiquethe-us-supreme-court-apple-v-pepper-case-gfYKWjlTFl

References (0)

References for this paper are not available at this time. We will be adding them shortly, thank you for your patience.

Publisher
Oxford University Press
Copyright
© The Author(s) 2019. Published by Oxford University Press. All rights reserved. For permissions, please e-mail: journals.permissions@oup.com
ISSN
2050-0688
eISSN
2050-0696
DOI
10.1093/jaenfo/jnz030
Publisher site
See Article on Publisher Site

Abstract

This issue’s Contemporary Critique discusses the US Supreme Court’s judgment in Apple v Pepper. The judgment may well shape future antitrust litigation in the Internet era, and impact on a platform’s leeway in regulating its ecosystem and those who can challenge its practices in court. Its broader effects on future class-action antitrust lawsuits have elicited heated debates on both sides of the Atlantic. In his commentary, Andrew Gavil suggests that the judgment’s spillover effects go well beyond the specific facts of the case and may trigger a debate about indirect purchaser standing and the ‘passing-on’ defence. He is of the opinion that the reasoning in Apple v Pepper with regard to the nature of antitrust damages and the importance of compensation principles will prove difficult to reconcile with the Supreme Court's earlier decision in Illinois Brick. Konstantinos Stylianou discerns the possible impact Apple v Pepper may have in Europe. He believes that it will impact future legal and policy options in the European Union (EU), for example, the process of updating the EU Vertical Block Exemption Regulation. Consumer welfare without consumers? Illinois Brick after Apple v Pepper Andrew I Gavil Andrew I Gavil Professor of Law, Howard University School of Law , Washington, DC, USA Professor of Law, Howard University School of Law , Washington, DC, USA Email: agavil@law.howard.edu I. INTRODUCTION For 40 years, US antitrust law has lived with an anomaly of the Supreme Court’s making: having declared its commitment to interpreting those laws as a ‘consumer welfare prescription’,1 the Court has nonetheless effectively barred consumers from suing for damages in private treble damage actions. This barrier to consumer standing followed from the Court’s position in Illinois Brick,2 that section 4 of the Clayton Act, which authorizes ‘any person … injured in his business or property by reason of anything forbidden in the antitrust laws’ to sue for and recover treble damages,3 should be limited to direct purchasers from an antitrust violator. Because the ultimate consumer in many common circumstances will be an ‘indirect purchaser’, Illinois Brick closed the federal courthouse doors to most consumer claims for damages, including consumer class actions. The Court appeared poised to perpetuate and extend that legacy in Apple v Pepper,4 a case that pitted a putative class of iPhone-using consumers against Apple and alleging that the company ‘monopolized the retail market for the sale of apps and has unlawfully used its monopolistic power to charge consumers higher-than-competitive prices’.5 Apple moved to dismiss the complaint, arguing that the consumers were indirect purchasers who were barred from suing under a straight-forward application of Illinois Brick. Apple argued that it acted much like any retailer, providing distribution services to app developers, who independently set the prices to be charged by Apple to consumers, making consumers indirect purchasers in their dealings with Apple. But in contrast to the typical Illinois Brick chain of distribution, Apple, not the app developers, was the alleged antitrust offender. The consumers responded, therefore, that because they had dealt directly only with Apple, they were direct purchasers and Illinois Brick had no effect on their standing. In a 5-4 decision, the Court sided with the consumers, concluding that they were direct purchasers and could therefore proceed with their action. For the first time in four decades, a majority of the Court stepped back from what might have been yet another extension of Illinois Brick, opening the door for a consumer class action for damages to proceed against Apple. At the surface, therefore, Apple is less an application of Illinois Brick than it is a case that distinguishes it: because the consumers in this market were deemed direct purchasers, Illinois Brick did not apply. The facts, having thus been distinguished, would appear to leave Illinois Brick intact for cases involving distribution chains more closely analogous to Illinois Brick. In such cases, defendants will continue to assert that indirect purchasers are barred from suing for damages and direct purchasers will still expect to recover the full overcharge attributable to anticompetitive conduct. This essay examines the Apple decision with a focus on two issues: its seeming rehabilitation of compensation principles and its approach to evaluating antitrust damages. Together, these two aspects of the Court’s reasoning may undermine the continued vitality of Illinois Brick. It argues that, although the Supreme Court formally retained what it described as the ‘bright line’ rule of Illinois Brick, the Court’s logic in explaining the nature of damages that flow from antitrust violations will prove hard to contain and difficult to reconcile with Illinois Brick’s simplistic conception of ‘pass-on’. That, in turn, will likely alter how parties litigate antitrust damage claims with multiple claimants in ways likely to invite future challenges to Illinois Brick. Apple also may have reopened long-simmering debates in the USA about how best to balance the twin remedial goals of deterrence and compensation. Since Illinois Brick, that balance has been tilted decidedly in favour of deterrence, whereas Apple has nudged US law back in the direction of compensation, ever so slightly realigning it with the policy priorities of many states and the EU. On the other hand, given the evolution over four decades of a fairly intricate federal-state, public–private enforcement ecosystem in the USA, one that now includes various stakeholders with established interests, resolving the evident tension between Illinois Brick and Apple may be too difficult a task for the courts to accomplish in any one case. Any significant reform of the US private right of action will require a kind of systemic rebalancing that, institutionally, can only be performed by Congress. II. A RETURN TO COMPENSATION PRINCIPLES? In June 1979, the Supreme Court memorably declared that ‘Congress designed the Sherman Act as a “consumer welfare prescription”’.6 It did so in a case brought as a putative class action on behalf of retail purchasers of hearing aids, who alleged that five hearing aid manufacturers had engaged in both horizontal and vertical price-fixing. It was undisputed that the consumers had purchased their hearing aids from independent retailers, not directly from the manufacturers. The issue before the Court, however, was not whether the allegedly overcharged consumers were direct or indirect purchasers, but whether they were injured in their ‘business or property’ as is required by section 4 of the Clayton Act. The Court concluded that they were. Although the Court’s decision two years earlier in Illinois Brick is referenced in a footnote, the Court declined to consider its application to the case, because the issue had not been addressed in the lower courts. The Court’s analysis in Reiter began with the text of section 4, emphasizing its first two words: ‘any person’. Quoting from two of its previous decisions, the Court observed: ‘The Act is comprehensive in its terms and coverage, protecting all who are made victims of the forbidden practices by whomever they may be perpetrated.’…. And the legislative history of the Sherman Act demonstrates that Congress used the phrase ‘any person’ intending it to have its naturally broad and inclusive meaning. There was no mention in the floor debates of any more restrictive definition.7 The Court later added that ‘the leading proponents of the legislation perceived the treble damages remedy … as a means of protecting consumers from overcharges resulting from price-fixing’ and ‘[a]t no time [in the legislative debates] … was the right of a consumer to bring an action for damages questioned.’8Reiter, therefore, associated the private right of action with compensation. In retrospect, Reiter seems anomalous. Only two years earlier, the Court had, in Illinois Brick, ignored section 4’s unambiguous statutory text and legislative history, as well as its own previous opinions, to reach a result that was widely perceived as anti-consumer: prohibiting suits for damages by indirect purchasers, who are often consumers at the end of a distribution chain. In doing so, the Court was largely animated by its concern for administrability, but also its interest in maximizing section 4’s deterrent effect. The perception that Illinois Brick undermined compensation and was hence anti-consumer led many US states to adopt their own broader private rights of action, which authorized indirect purchasers to sue for damages as a matter of state antitrust law.9 Forty years later, Apple v Pepper seems to have come full circle—at least thematically—returning to the text-based, compensation-promoting reasoning that propelled the Court in Reiter. As the Court did in Reiter, the Apple majority starts with the unqualified ‘any person’ text of section 4. And, like Reiter, it lauds the compensation goals of the private right of action: ‘[l]eaving consumers at the mercy of monopolistic retailers simply because upstream suppliers could also sue the retailers makes little sense and would directly contradict the longstanding goal of effective private enforcement and consumer protection in antitrust cases.’10 The Court then concludes by proclaiming that ‘“protecting consumers from monopoly prices” has been “the central concern of antitrust”’ since 1890.11 Apple v Pepper also echoes the warnings voiced by Justice Byron White and his fellow dissenting justices in Kansas v UtiliCorp United, Inc in 1990. Justice White, who had written the majority opinion for the Court in Illinois Brick, refused to join the majority in UtiliCorp, which further extended Illinois Brick. He cautioned that Illinois Brick ‘did not hold that, in all circumstances, indirect purchasers lack § 4 standing’.12 As had the Court in Reiter, he observed that the ‘plain language’ of section 4 ‘reflects an expansive remedial purpose’ and that ‘Congress sought to ensure that victims of anticompetitive conduct receive compensation.’13Illinois Brick, in short, should not be thoughtlessly extended to factually distinguishable cases that do not similarly pose the concerns that animated Illinois Brick. Apple v Pepper resonates with the UtiliCorp dissent, too, when it states that ‘Illinois Brick is not a get-out-of court-free card for monopolistic retailers to play any time that a damages calculation becomes complicated.’14Apple’s synthesis of Reiter and the UtiliCorp dissent, therefore, could be interpreted as a signal to the lower courts that they should be more circumspect in responding to calls for rote application and extension of Illinois Brick and more attentive to the compensation goals of the private right of action. That focus on compensation also led the Court to rethink how antitrust damages and ‘pass-on’—a controlling concept in Illinois Brick—are understood. III. APPLE V PEPPER AND ANTITRUST DAMAGES The line of cases that leads to Apple v Pepper began more than 50 years ago with Hanover Shoe, Inc v United Shoe Machinery Corp15 and became cemented nearly a decade later in Illinois Brick.16 Collectively, these decisions have focused on some of the most important conceptual and administrative challenges associated with implementing an antitrust private right of action, including: ‘what are the damages that flow from anticompetitive conduct, and how should they be measured?’ and ‘who can recover those damages, and how can the private remedy be integrated best into the overall scheme of antitrust enforcement?’ In part, the answers to these questions have turned on traditional legal interpretation, but they also have called for judgment calls that plunged the US antitrust system into a half-century of controversy that pitted the goals of deterrence and compensation against each other. Identifying ‘antitrust damages’ also has been influenced by the nature of the challenged conduct, which most often has been cartel behaviour, but also monopolization, and a focus on price-related damages. Such damages typically are associated with the exercise of market power, which in turn leads to the label ‘overcharge’: the difference between the price that was facilitated by anticompetitive conduct and the market price that would have otherwise prevailed. In the USA, the debate has been coloured, as have many other matters related to interpretation of the antitrust laws, by other characteristics of the US private right of action, especially the prevailing plaintiff’s right to recover treble damages and attorneys’ fees. Hanover Shoe addressed whether an antitrust offender should be permitted to defend against damage claims by claiming that the most immediate victim of the offense—the ‘direct purchaser’—was not harmed, because it had ‘passed-on’ all or part of any anticompetitive ‘overcharge’ facilitated by the anticompetitive conduct. In Hanover Shoe, that conduct was monopolization of a market for shoe manufacturing machinery. Concerned that a ‘no-harm-no-foul’ defence would undermine the deterrent effect of the private right of action, the Court declared that such inquiries would not be allowed. The Court in Illinois Brick made the important assumption nearly a decade later that the rules on ‘pass-on’ should be symmetrical: if a defendant could not argue that damages to the direct purchaser were passed on, then an indirect purchaser-plaintiff should not be allowed to argue that the direct purchaser passed on all or part of the overcharge to it. The Court also expressed its concern that allowing indirect purchasers to sue would commit the courts to complex damage inquiries and could allow for multiple and duplicative recoveries and hence over-deterrence. Critically, it also made the assumption that concentrating the private right of action in the hands of direct purchasers, who were in the best position to detect violations and would have the incentive to sue, would best promote deterrence. The end result was that, despite the ‘any person’ language of section 4 of the Clayton Act, indirect purchasers were barred from asserting federal antitrust claims for damages in most circumstances. Deterrence appeared to take priority over compensation, at least as a matter of federal law.17 But Illinois Brick seemingly overlooked portions of Hanover Shoe that betrayed a degree of uncertainty (or perhaps confusion) about the proper measure of antitrust damages. That long-dormant uncertainty resurfaced in Apple v Pepper. One of the most significant points of disagreement between the majority and the dissent in Apple v Pepper goes to the heart of what is meant by ‘antitrust injury’: what is the nature of the damages being sought in the case? The Court’s response to that question provided the premise for its conclusion that the members of the plaintiff–consumer class were not indirect, but in fact were direct purchasers. The majority concluded that both the app developers and consumers may have been injured by Apple’s conduct in requiring that all app sales be made through its App Store and at an allegedly supra-competitive commission rate—but that their respective damages were distinct and not duplicative. In the majority’s view, the app developers’ damage, if any, was not ‘the overcharge’, but any lost profits occasioned by the overcharge, which they experienced as an increased cost. Under this view, Apple’s distribution services were an input for app developers and the high cost of those services may have forced app developers to raise their app prices. Higher prices can reduce demand (depending on its elasticity) and hence the app developers may have lost the profits they otherwise could have made from consumers who would have purchased their apps in greater numbers if distribution costs and hence prices were lower, ie ‘competitive’. In contrast, the members of the putative consumer class suffered the resultant overcharge: the consumers who continue to purchase apps pay whatever higher prices the app developers must charge to adjust for their increased costs. This analysis of damages was arguably at odds with the long-standing view of ‘pass-on’ as a level-by-level evaluation of pricing, alone. Responding to Apple’s argument that allowing the consumers to sue would entail just the kind of risk of pass-on and duplicative recovery identified in Illinois Brick, the Court reasoned: Here, some downstream iPhone consumers have sued Apple on a monopoly theory. And it could be that some upstream app developers will also sue Apple on a monopsony theory. In this instance, the two suits would rely on fundamentally different theories of harm and would not assert dueling claims to a ‘common fund,’ as that term was used in Illinois Brick. The consumers seek damages based on the difference between the price they paid and the competitive price. The app developers would seek lost profits that they could have earned in a competitive retail market. Illinois Brick does not bar either category of suit.18 The dissenting justices took a different view. Referring to Hanover Shoe, the dissent in Apple asserts that ‘[a]s damages, Hanover sought to recover the amount it had overpaid United for machinery.’ But a closer examination of Hanover Shoe reveals that its own description of the plaintiff’s damage claims was more equivocal: ****We think it sound to hold that when a buyer shows that the price paid by him for materials purchased for use in his business is illegally high and also shows the amount of the overcharge, he has made out a prima facie case of injury and damage within the meaning of § 4. If in the face of the overcharge the buyer does nothing and absorbs the loss, he is entitled to treble damages. This much seems conceded. The reason is that he has paid more than he should and his property has been illegally diminished, for had the price paid been lower his profits would have been higher. It is also clear that if the buyer, responding to the illegal price, maintains his own price but takes steps to increase his volume or to decrease other costs, his right to damages is not destroyed. Though he may manage to maintain his profit level, he would have made more if his purchases from the defendant had cost him less. We hold that the buyer is equally entitled to damages if he raises the price for his own product. As long as the seller continues to charge the illegal price, he takes from the buyer more than the law allows. At whatever price the buyer sells, the price he pays the seller remains illegally high, and his profits would be greater were his costs lower.19 One way to read this passage is that the harm to the direct purchaser is lost profits occasioned by the overcharge, not the overcharge itself. For the direct purchaser, an ‘overcharge’, whether the result of monopoly behaviour (Hanover Shoe) or a cartel (Illinois Brick), is an increased input cost. In Apple v Pepper, it is the elevated cost of distribution services for app developers. Extrapolating further from Hanover Shoe, there would be two kinds of antitrust damages recognized for an overcharged direct purchaser, and both are types of lost profits: (i) if a direct purchaser raises price, it could lose profitable sales; (ii) if, owing to greater price sensitivity, for example, it cannot raise price, its margins may shrink. This is what is colloquially referred to as ‘absorbing the overcharge’. This is not, of course, an ‘either or’ choice. A direct purchaser might experience lost profits owing to some combination of lost sales and lower margins on the sales it still makes. In both instances, the injury to the direct purchaser is not the overcharge, but the lost profits occasioned by the overcharge. This would also be true for any intermediary purchaser of an input in an Illinois Brick-type distribution chain. Only the ultimate consumer pays an ‘overcharge’, and calculating it should not depend on ‘pass-on’—there is, in fact, no such thing in the sense the Court has discussed since Hanover Shoe. As Professor Hovenkamp has observed with reference to Apple, ‘the real injury to direct purchasers and other intermediaries in the distribution chain is not from the overcharge at all; rather, it is from the loss of sales volume. As a result the “overcharge” is not even the theoretically correct measure of damages for an intermediary who passes on at least part of an overcharge’.20 He continues: If we really wanted to reward damages based on injury to a buyer’s business or property, as the statute [Section 4 of the Clayton Act] requires, we would compute damages as lost profits for all intermediaries, including the direct purchaser. Only the final purchaser, or consumer, should obtain damages for the amount of the overcharge passed on to it. Lost profit damages do not present problems of computing pass on. To be sure, in common with all commercial damages formulas they do impose some complexities, but these are not different in substance from those experienced by the victims of exclusionary practices generally.21 The mix of lost profits—reduced margins and/or reduced sales—will depend on a number of factors, such as the degree of downstream competition, elasticity, and margins. But as Hovenkamp argues, and as seems implicit in the Apple majority’s reasoning, the nature of antitrust damages and its relationship to ‘pass-on’ has long been misinterpreted in the USA.22 To return to the example of Apple. As the majority observed, ‘through contractual and technological’ means, Apple has arguably made itself into a toll bridge that connects app developers with consumers. In addition to the consumer plaintiffs who brought the case, another class action has now been filed on behalf of a class of app developers. Both classes will attempt to prove that in a market unencumbered by Apple’s restrictions, app developers, and other content-providers might compete with each other and with Apple for distribution services. App developers might still choose to sell apps through the App Store, or they might choose direct distribution, dual distribution, some combination of the three, or methods yet to be developed. The cost of distribution services might be less (or it might just be co-opted by the developers), and the quality of services might be higher. The essential point is that the end result would be a distribution market produced by competitive forces, not Apple’s self-interested conception of how Apple iOS-compatible apps should best be distributed. Assuming that the plaintiffs can support this theory of anticompetitive effect, whether they continue to assert claims under section 2 of the Sherman Act, or they turn to focus on the contractual restraints and thus also include claims under section 1 of the Sherman Act, Apple would have to provide pro-competitive business justifications for the specific restrictions it has imposed on app developers and consumers. If it can do so, under a Microsoft-influenced approach to evaluating section 2 claims, the Court will then have to evaluate the relative strength of the evidence of harm and benefit,23 and if the rule of reason framework seemingly endorsed by the Supreme Court in Ohio v American Express Co, is applicable to Apple’s restraints, a critical issue in the case will be whether there are less restrictive ways that Apple can realize any legitimate goals it may be able to establish.24 But in terms of damages, the Supreme Court has mapped out a different course than might have been followed under the ‘pass-on’ approach associated with Illinois Brick. As the Court itself signalled, the app developers will focus on proving lost profits owing to the elevated cost of Apple-provided distribution services, whereas the consumers will have to show that Apple’s practices have resulted in supra-competitive app prices, or perhaps other competitive harms. But neither class will, if it follows the Court’s roadmap, be hiring economists to prove ‘pass-on’. IV. CONCLUSION Although the Apple majority suggests that its holding is limited to the facts of Apple, its reasoning may prove difficult to contain. Whether a victim of an antitrust violation is a ‘direct’ or ‘indirect’ purchaser may matter less after Apple than the nature of their damages. If it is an intermediary, courts may read Apple to suggest that the harm it suffers is not the overcharge, but the consequences of the overcharge. That would be true if, as in Apple, it is a firm in a market with a dominant retailer, but it might also be so if, as in Hanover Shoe and Illinois Brick, the intermediary purchased an input at supra-competitive prices attributable to an antitrust violation, such as cartel behaviour or monopolization. Apple v Pepper may therefore trigger debate about the continued reliance on the label ‘pass-on’. That label was never an accurate description of the kinds of damages that can flow from an antitrust violation. Ironically, the Apple v Pepper dissent may have contributed a valuable component of the future debate when it suggested a focus on ‘proximate cause’, but its crimped approach to proximate cause side-stepped the long-established principal of tort that can also aid antitrust analysis: different harms can flow to different types of persons from a single tortious act. Antitrust violations that end in the exercise of market power—an ‘overcharge’—are just such acts. They may simultaneously harm intermediaries by raising their input costs and diminishing their profits, and consumers who pay whatever higher price eventually results from that market distortion, a distortion that, as Professor Hovenkamp observes, can be conceptualized and measured without reference to pass-on. In this sense, the dissenters may have been right in refocusing attention on causation. They were wrong, however, in continuing to perpetuate the mistake of Illinois Brick that the right to sue should be artificially limited to the most proximate plaintiff of only one type of injury and no other. Such a return to principles of compensation, however, may ultimately have a deleterious effect on the US private right of action. As I have previously written, greater focus on ‘actual damages’ will favour defendants, leading to more motion practice directed at damage measurement and allowing them to further raise the costs of antitrust litigation for plaintiffs. It could also provide a back-door way for defendants to reintroduce a pass-on-styled defence. Defendants will seek to pit various plaintiffs against each other in pursuit of actual damages, distracting from the measure of recovery that is most important from the point of view of deterrence: the full overcharge.25 Because US enforcement agencies largely lack the authority to recover civil fines, any diminution of the ability of direct purchasers to recover that overcharge could undermine deterrence, which was one of the primary concerns voiced by the Court in Illinois Brick. Preparation of this article was made possible by a 2019 summer research stipend provided by the Howard University School of Law, which is gratefully acknowledged. Footnotes 1 Reiter v Sonotone Corp (1979) 442 US 330, 343. 2 Illinois Brick Co v Illinois (1977) 431 US 720. 3 15 USC § 15 (emphasis added). 4 (2019) 139 S Ct 1514. As both the majority and dissenting opinions note, neither party in Apple v Pepper asked the Court to overrule Illinois Brick, although as the Court also observes, 30 states and the District of Columbia filed an amicus brief inviting the Court to do so. 5 ibid 1518. 6 Reiter (n 1) 343. 7 ibid 337–38. The Court quoted from Pfizer Inc v Government of India (1978) 434 US 308, 312, which in turn relied on Mandeville Island Farms, Inc v American Crystal Sugar Co (1948) 334 US 219, 236. 8 Reiter, ibid 343. 9 In California v ARC America Corp (1989) 490 US 93, the Court held that Illinois Brick did not preempt these state law ‘Illinois Brick repealers’. See also Apple v Pepper (n 4). 10 Apple v Pepper (n 4) 1524 (emphasis in original). 11 ibid 1525. 12 Kansas v Utilicorp United, Inc (1990) 497 US 199, 220 (White, J, dissenting). 13 ibid 219–20. 14 Apple v Pepper (n 4) 1524. 15 (1968) 392 US 481. Hanover Shoe was a private follow-on case to the government’s earlier, storied monopolization case against United Shoe Machinery. See United States v United Shoe Mach Corp (1953) 110 F Supp 295 (D Mass); aff’d per curiam (1954) 347 US 521. The private plaintiff, as had the government, alleged that United Shoe’s practice of only leasing, rather than selling, its shoe manufacturing machinery allowed it to maintain its monopoly of shoe machinery and made it more costly for shoe manufacturers like Hanover Shoe to produce shoes. 16 For an analysis of the internal deliberations of the Supreme Court in Illinois Brick informed by the personal papers of some of the Supreme Court Justices who decided the case, see Andrew I Gavil, ‘Antitrust Remedy Wars Episode I: Illinois Brick from Inside the Supreme Court’ (2005) 79 St John’s L Rev 553. 17 Illinois Brick was almost instantly criticized for this set of assumptions and for undermining compensation, which in turn led many US states to adopt ‘Illinois Brick repealers’ as a matter of state antitrust law. In California (n 9), the Supreme Court concluded that these state antitrust laws were not preempted by Illinois Brick and could coexist with it. For an examination of the consequent, complex federal-state US private antitrust remedial system that emerged, see Andrew I Gavil, ‘Federal Judicial Power and the Challenges of Multijurisdictional Direct and Indirect Purchaser Antitrust Litigation’ (2001) 69 Geo Wash L Rev 860. 18 Apple v Pepper (n 4) 1525 (emphasis added). 19 Hanover Shoe (n 15) 489–90 (emphasis added). 20 Herbert Hovenkamp, ‘Apple v. Pepper: Rationalizing Antitrust’s Indirect Purchaser Rule’ (29 May 2019) 10 (emphasis in original). U of Penn, Inst for Law & Econ Research Paper No 19-27, available at SSRN: <https://scholarship.law.upenn.edu/faculty_scholarship/2082/> accessed 14 October 2019. 21 ibid 10–11. See also Andrew I Gavil, ‘Thinking Outside the Illinois Brick Box: A Proposal for Reform’ (2009) 76 Antitrust L J 167, 181 (‘overcharges (and pass-on) are not actual damages for reselling direct and indirect purchasers; they constitute increased costs that may, in turn, reduce profits’). 22 The EU has long rejected Illinois Brick as inconsistent with its laws, which guarantee full compensation to all persons who are injured by an infringement of competition laws. In late 2014, to support private enforcement, in particular, the EU adopted Directive 2014/104 on antitrust damages actions, the ‘Damages Directive’, which recognized the importance of private actions for damages under the national competition laws of EU Member States and reflects the right of indirect purchasers to seek compensation. It also directed the European Commission to adopt guidance for calculating pass-on, see <https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv:OJ.L_.2014.349.01.0001.01.ENG>, which the Commission did in 2019. See <http://ec.europa.eu/competition/antitrust/actionsdamages/passing_on_en.pdf> accessed 14 October 2019. Those Guidelines, which focus on cartel-caused damages, address both passing-on, or ‘price effects’, and what the Commission has labelled ‘volume effects’, which it describes as follows: When the direct purchaser, fully or partially, passes on the overcharge to the indirect purchaser, the latter will not only face a price effect but in many cases also reduce its demand, so that the direct purchaser sells less. The value of the sale that is lost can be referred to as the volume effect of passing-on … . Ibid, para 10. The Guidelines go on to offer an explanation for the relationship between price and volume effects, and provide instructions for how they can be calculated in private actions to differentiate between ‘price effects’ and ‘volume effects’. Apple v Pepper and the EC guidance, therefore, share a common awareness that understanding the interdependence of and relationship between overcharges and lost profits is essential. 23 United States v Microsoft Corp (2001) 253 F 3d 34, 58–59 (DC Cir) (explaining rule-of-reason-style burden-shifting framework for analysing exclusionary conduct). 24 Ohio v American Express Co (2018) 138 S Ct 2274, 2284 (explaining three-step rule-of-reason burden-shifting framework applicable to vertical restraints under s 1). 25 Gavil (n 21) 175–79. © The Author(s) 2019. Published by Oxford University Press. All rights reserved. For permissions, please e-mail: journals.permissions@oup.com This article is published and distributed under the terms of the Oxford University Press, Standard Journals Publication Model (https://academic.oup.com/journals/pages/open_access/funder_policies/chorus/standard_publication_model)

Journal

Journal of Antitrust EnforcementOxford University Press

Published: Oct 1, 2019

There are no references for this article.